REIT Earnings Report Q2 2023

The open-air shopping center REITs recently wrapped up their earnings calls for the 2nd quarter of 2023. Like the previous quarter, leasing and operations remained strong, while the transactions market remained relatively muted. A lack of new supply, primarily due to increased construction costs, has led to the best leasing demand seen in recent memory. Site Centers mentioned that they just priced a ground-up JR Anchor Box as part of a redevelopment, and the costs to build came back at ~$300/SF. They also recently started construction on several multi-tenant pad buildings that are expected to cost an average of ~$500/sf. On their current redevelopments, they have signed LOIs at an average of $60/SF NNN, which supports the required returns for construction. However, in many smaller markets, it’s difficult to obtain high enough rents to justify the risk of new development. Although the transaction market remains challenged, there may be light at the end of the tunnel, as several of the institutions mentioned that over the last quarter, they have seen more opportunities come to market with more realistic pricing expectations. Federal Realty stated that they are seeing the market pick up a bit, and the bid/ask spread is starting to narrow. Brixmor stated that although the volume is still relatively low, pricing is starting to move where they believe they can acquire accretively. Kimco mentioned that they’re seeing grocery-anchored neighborhood centers still being priced aggressively and may turn to acquiring larger centers that have better going-in yields. They wouldn’t confirm on their earnings call, but they’re rumored to be buying a $170M property in Northern Virginia.

Transaction Activity

Subsequent to quarter-end, there was big news hot off the press as Kimco announced that they’d be acquiring RPT Realty in an all-stock transaction valued at approximately $2B. RPT shareholders will receive 0.6049 of a newly-issued Kimco share for each RPT share they own, which represents a 19% premium to RPT’s closing share price on August 25, 2023. Roughly 70% of RPT’s properties align with Kimco’s key strategic markets, and Kimco expects meaningful NOI growth opportunities from mark-to-market opportunities, and a robust ‘signed-not-opened’ pipeline. After the acquisition closes in the beginning of 2024, it will add 56 open-air shopping centers, including 43 wholly-owned and 13 joint venture assets, comprising 13.3 million square feet of gross leasable area, to Kimco’s existing portfolio of 528 properties. There was also another acquisition in the space that closed recently as Regency Centers acquired Urstadt Biddle Properties in an all-stock transaction valued at approximately $1.4B. The transaction brings Regency’s portfolio up to 480 properties and grows their footprint throughout the Northeast.

In other news, Site Centers continued their buying spree of convenience assets, as they acquired three convenience centers for $48.5M. Two of the centers were in Atlanta (Alpha Soda Center & Barrett Corners) and the other center was located in Houston (Briarcroft Center). They sold two properties: West Falls Plaza in a New York MSA and Highland Grove Shopping Center in a Chicago MSA. They stated that they will continue to focus on convenience centers, but for the time being are expecting transaction volume to remain low due to the capital markets volatility. Most of the REITs were focused on disposing assets in Q2, as Brixmor sold $26.8M worth of real estate consisting of two shopping centers and five partial properties. The two centers were Elk Grove Town Center located in a Chicago suburb, and the mostly vacant Spring Mall in Milwaukee, WI. The partial properties were primarily outparcels to existing centers that they already own. Kimco did not acquire any properties, but sold one property, one outparcel, and three land parcels totaling $46.2M. The one center that they sold was Promenade at Christiana in Newark, DE for $32M. Kite Realty Group was quiet on the acquisition side, but sold Kingwood Commons in Houston, TX for $27.4M, and Pan Am Plaza, an undeveloped land parcel in downtown Indianapolis for $52M. Phillips Edison sold one property in Hamilton, OH for $4.8M, one McDonald’s outparcel in Racine, WI for $1M, and a vacant land parcel for $450k. The weighted-average cap rate on their dispositions was 8.7%. They also were on the sidelines when it came to acquisitions. RPT and Urban Edge were relatively quiet as they both had minimum transaction activity. ROIC did not have any transaction activity but stated they expect to sell a couple vacant land parcels in the Bay Area that are primed for multi-family development. Federal Realty also did not have any transaction activity.

The STNL REITs remained active as Realty Income led the way acquiring 561 properties at an average cap rate of 6.9% and a WALT of 16.7 years. They mentioned on their call that they are starting to see cap rates stabilize after a meaningful adjustment period. Agree Realty acquired 92 properties at an average cap rate of 6.8% and a WALT of 9.9 years. They stated that their acquisitions for this quarter were about 10bps higher than the previous quarter, and about 60bps higher than full year 2022. They mentioned that they are seeing an increase in opportunities due to a lack of competition in the market and expect their cap rates for the upcoming quarter to be a bit higher than the previous quarter, and 70bps points higher than the previous year. NETSREIT acquired 45 properties at a cap rate of 6.8% and a WALT of 11.6 years. They are also expecting Q3 acquisitions to have higher cap rates than the previous quarter and are also seeing good opportunities from less competition due to a dwindling amount of 1031 buyers and high-leverage buyers. Alpine Income Realty Trust acquired 9 properties consisting of high-quality tenants such as Chick-Fil-A, Home Depot, Lowe’s, Best Buy, Dick’s Sporting Goods, Verizon, HomeGoods, Starbucks, & Marshalls. Their average cap rate of acquisitions was 6.8%. REIT